HQLA stuck in the pipes, says European Central Bank

Drew Nicol, SL Times

EU collateral liquidity has “deteriorated” due to government bonds being ensnared in stringent collateral reuse and new margin rules, the European Central Bank (ECB) has found.

All types of euro-denominated collateral has suffered from the effects of EU liquidity regulations requiring banks to retain more high-quality liquid collateral on their books, but the central bank noted that “the deterioration was most pronounced for government bonds”.

The market’s troubles were revealed as part of the ECB’s quarterly qualitative survey on credit terms and conditions in euro-denominated securities financing and over-the-counter (OTC) derivatives markets.

The survey collected qualitative information on changes between December 2016 and February 2017. The results are based on responses from a panel of 28 large banks, comprising 14 euro area banks and 14 banks with head offices outside the euro area.